Internet service provider Afrihost has set the proverbial cat among the pigeons by slashing its broadband prices to below cost in what could mark the start of a price war.
Afrihost, which provides Web hosting services, entered the broadband digital subscriber line (DSL) market just two months ago. But already it’s causing a stir by cutting the price of bandwidth — at least temporarily — to just R29/GB, or 2,9c/MB. Until now, DSL broadband prices have typically been set at between R50/GB and R70/GB.
But is the price cut sustainable?
Afrihost CEO Gian Visser, pictured, concedes that the company is losing money at R29/GB. But he says the offer makes good commercial sense.
He says Afrihost has taken the money it was planning to spend on advertising its DSL products and instead decided to use that cash to subsidise bandwidth.
“Our sign-ups [for DSL] were not that great when we started two months ago so we were planning to go out and do lots of advertising,” he says. “But instead we decided take our marketing budget and subsidise DSL accounts.”
Visser says anyone who takes advantage of the R29/GB offer — subscribers have to sign up for a month-to-month contract — will be able to take advantage of that price “forever”.
However, he says the new, lower price won’t necessarily last long for new subscribers. “It could end tomorrow; it could end in a few weeks,” he says.
Afrihost buys its bandwidth from Dimension Data division Internet Solutions (IS). It is understood that IS charges other service providers at least R40/GB for wholesale bandwidth.
IS business solutions director Hillel Shrock says Afrihost’s product is a clever marketing strategy to help it gain traction. “It’s difficult to position one’s brand without having some price advantage,” Shrock says.
“The question is to what extent this is sustainable,” he says. Though Shrock expects broadband prices to come down “dramatically” in the next few years, he says it’s difficult for smaller players like Afrihost to maintain loss-leading prices for too long.
Visser says Afrihost’s move could result in a price war. But he plays down a suggestion that it could hurt smaller players in the market. “Isn’t this what capitalism is about? Believe me, we’ve looked at this very carefully.”
Matthew Tagg, CEO of Afrihost rival Web Africa, says nothing has changed in wholesale bandwidth pricing in SA. Though he describes Afrihost’s move as “smart marketing”, he doesn’t believe it’s sustainable.
“I don’t see prices coming down below R50/GB until there is significant competition [in telecommunications infrastructure] both nationally and internationally,” Tagg says.
There was an expectation that the new Seacom submarine cable along Africa’s east coast would lead to significant price cuts, but Tagg says this won’t happen as the cable doesn’t offer a redundant route for international bandwidth.
If the Seacom cable is cut, there is no alternative cable along which service providers can route their traffic. This means they are still reliant on the Sat-3 cable in the west, he says.
Tagg doesn’t believe broadband prices will come down significantly until two new cable systems — the East Africa Submarine System and the West African Cable System — come on-stream in 2011 and until there is more competition in national fibre back-haul.
It’s clear, however, that smaller service providers are becoming increasingly innovative in their attempts to lure new customers.
Afrihost isn’t the only company that’s upping the ante in the broadband market.
First National Bank’s service provider, FNB Connect, announced earlier this week that it will provide free bandwidth to users accessing social networking website Facebook and Twitter between 7pm and 11pm. — Duncan McLeod, TechCentral